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Understanding The US-India Contention Over ICT Imports Duty

India’s commerce and industries minister Piyush Goyal visited Washington in mid-November to hold negotiations with the US Trade Representative (USTR) Robert Lighthizer. Subsequently, a USTR delegation also continued the talks, with a possible breakthrough on the horizon. The two rounds of negotiations bore hope, but as 2019 draws to a close, India and the US are still without any trade deal. While most rating agencies have downgraded their growth projections for India next year, at a time of a general economic slowdown, a trade deal in the closing days of the year would reassure foreign investors about India’s economic prospects.

However, the difference in opinion over tariff structure for Information and Communications Technology (ICT) products has become a key bone of contention. If import tariffs are reduced, India fears an influx of Chinese electronic products — which would further increase its trade deficit with China and decrease the competiveness of India’s domestic industry.

The American perspective and India’s response to the recent developments

Not on the same page on many trade issues, the US continues to voice its long-standing concern over apparent inconsistencies in India’s tariff structure on ICT products. The Union Budget for 2018-19 had increased the import duties from 15 percent to 20 percent on high-end mobile phones. This change in tariff structure on ICT products attracted concern among many countries including Japan, Taiwan and the European Union.

Subsequently, Washington sought consultations in July under WTO’s dispute settlement mechanism over this increase, alleging India of breaching binding trade commitments. As the consultation process failed, more countries have sought to join the dispute due to their significant interest in India’s market for ICT products — which goes beyond mobile phones to include all devices capable of processing information and transmitting the same electronically.

The obligations under ITA-1 didn’t benefit India as a manufacturer, while tariff cuts have hurt the domestic players allowing for foreign companies to flourish in a lucrative market.

India is a signatory to the Information Technology Agreement (ITA) of WTO along with 81 other signatories. It requires signatories to eliminate taxes and tariffs on IT products and facilitate better trade in the relatively new sector. In 1997, under ITA-1, India slashed tariffs to zero on over 200 products that included monitors, computers and set-top boxes.

India’s import of ITA-1 products has increased from USD 1 billion in 1996 to USD 32 billion in 2015, registering an average growth rate of 20 percent. On the other hand, exports have only increased from half a billion to 2.2 billion in the same period. The obligations under ITA-1 didn’t benefit India as a manufacturer, while tariff cuts have hurt the domestic players allowing for foreign companies to flourish in a lucrative market.

However, due to government measures like tariff structure rationalization and provision of incentives to the domestic industry, India is alleged to have violated the ITA-1 agreement of WTO, which binds the signatories to maintain zero tariffs on IT products as an obligation to provide a coherent free trade system. But the Indian contention is that the items in dispute are not included in the terms agreed and cannot be interpreted to include the relatively new products like high-end smart phones.

In 2015, this trade imbalance prompted the Indian government to keep off from theITA-2.Abstaining from ITA-2 helped India contend that it is not obliged to operate under ITA-2’snew definition which covered more goods. Going forward, New Delhi faces an uphill task of defending its stance against proponents of free trade, as most of the countries are part of that updated agreement. India should continue providing protection against better positioned Chinese counterparts who prospered under a state led incentive programs.

While India’s demand for electronic goods is estimated to reach USD 350 billion by 2025, its domestic production is projected to meet only a third of the domestic demand.

While India’s demand for electronic goods is estimated to reach USD 350 billion by 2025, its domestic production is projected to meet only a third of the domestic demand. This difference in demand and supply can help China gain more market access in India, while Indian companies won’t be able to hold ground in a highly competitive market unless government intervenes with support for the domestic industry.

To address that concern and make India into a manufacturing hub for electronics and communications, the government has initiated programs like ‘Make in for India’. However, till such time these programs are scaled up, the market is vulnerable to Chinese dominance if the import tariffs are eased.

The China factor in India’s concern on ICT imports

China has grown in prominence in the global IT sector due to its success in luring backtech-entrepreneurs and scientists from western countries with state-led incentive programs. Chinese firms have started to compete with foreign companies in high-value industries with the standout example of telecom giants like Huawei and ZTE, which have expanded their range and added sophistication to their activities.

Such notable upskilling has produced results in the trade arena with China being the lead exporter in the ICT market. Brands like OnePlus have helped remove the negative perception around Chinese products, and are fast evolving into credible competitors to Silicon Valley companies. This evolution of an indigenous startup complex in the Chinese tech industry has impacted even global giants like Samsung and Apple.

Chinese smartphone maker BBK Electronics, or the Guangzhou-based Bu Bu Gao Electronics, which sells under different brands including Vivo, Oppo, Realme and OnePlus, has the largest share of the Indian smartphone market. Together, these brands now control over 40 percent of the smartphone market, with their market share rate continually on the rise.

Brands like OnePlus have helped remove the negative perception around Chinese products, and are fast evolving into credible competitors to Silicon Valley companies.

In relative comparison, US tech giant Apple’s share of the Indian mobile phone market is between 1.2 and 2 percent. The influx of Chinese phones has effectively pushed out Indian brands like Micromax, Lava, and Intex, who were in the top-five list of phone makers in the country until only a few years ago. India’s ambition of becoming a vital part of the global value chain in manufactured products will be tested on being able to compete with other Asian giants, especially China.

The import tariff on certain components like integrated circuits and LCD panels is already zero in India. And a majority of the imports in the realm of semiconductor devices are from either China or Taiwan. So the government should give domestic manufacturers tax and duty incentives to offset the effect of lower import tariffs. Else, it would only accentuate problems over India’s huge trade deficit, while also decreasing the competitiveness of the Indian electronics manufacturers.

Repercussions of cutting ICT import duties

The re-routing of its exports through Vietnam has helped China circumvent the nations’ stigma against rising Chinese imports. China’s share of telecommunication equipment dropped from around 71 percent during 2016-17 to 53 percent in 2018, while Vietnam’s share jumped four times from about 3 percent to about 12 percent between 2017 and 2018. For India, this scenario raises many questions, especially as Vietnam is a beneficiary under the India-ASEAN FTA.

With its emphasis on decreasing India’s ICT import duties across the board, the US is in a way batting with China against India, not realizing that Chinese phones — not US ones — will flood the Indian market, if New Delhi lowers tariffs. In other words, the US, by picking a fight with India on tariffs, is picking up the wrong end of the stick. Given the current influence of China over the Indian market, lower tariffs will only help China make deeper inroads, rather than provide US-made mobiles any ease of access.

In this light, India will have to diligently craft its strategy when engaging with the US on the ICT trade tariff. India cannot afford to depend on imported electronics as the backbone of its critical digital infrastructure. It is extremely important to also strengthen the local manufacturing ecosystem for electronics and components.

Washington, on the other hand, needs to recognize India’s concern and promulgate a deal which does not further favor Chinese expansion in the Indian market. One such way could be to emphasize middle-of-road solutions, like reducing tariffs on high-end imported mobile phones only, so as to benefit only US manufacturers like Apple.

Any such strategy, however, will have to be in sync with India’s interests of giving a boost to its local manufacturing base. – ORF Online

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